Electronic Submission for Qualifying Foreign Institutions: Income Tax Law, VAT Law, and Tax Code

Picture of Gabriela Galdámez

Gabriela Galdámez

This year, the modification of the Instructions for Qualifying Institutions Domiciled Abroad in the context of the Income Tax Law, Value Added Tax Law, and Tax Code came into effect. This instruction is jointly developed and reviewed by the Central Reserve Bank and the General Directorate of Internal Revenue.

  • What is the purpose of this instruction?

The instruction aims to regulate the procedure and requirements that foreign entities must fulfill to be qualified by the Central Reserve Bank of El Salvador, hereinafter referred to as the “BCR,” in order to comply with the provisions that establish the following tax benefits:

1- Exemptions from Income Tax on interest for financing granted by institutions domiciled abroad.

Article 4, number 11) of the Income Tax Law establishes that income from interests derived from credits granted abroad by:

    • International organizations; agencies or development institutions of foreign governments; foreign governments; and non-profit corporations or foundations domiciled abroad, the latter properly legalized by competent authorities of their country of origin, whose non-profit nature is verified in their articles of incorporation and qualified by the BCR.
    • Investment funds, Private Fund Administrators, public or private specialized funds domiciled abroad, properly legalized by competent authorities in their country of origin and qualified by the BCR, intended for cooperative savings and loan associations, public law corporations, and foundations, which provide financing to micro and small businesses.

Reduced withholding rates for financing provided by financial institutions domiciled abroad. Article 158, third paragraph, letter c) of the Tax Code indicates that taxpayers domiciled in the country who pay or credit income for financing services provided by financial institutions domiciled abroad, supervised by a financial regulation entity or authorized or registered by competent authority in their countries of origin and previously qualified by the BCR, will withhold Income Tax at a reduced rate of 10%, as a definitive payment of the tax. The services of financing provided between related parties are exempt from this treatment and will be subject to a 20% withholding.

Related to the above, Article 158-A, final paragraph, letter d) of the Tax Code states that the application of reduced rates is an exception to the 25% withholding rate as a definitive payment of the tax when the income is paid or credited to natural or legal persons, entity or group of persons or any subject, constituted, domiciled or residing in countries, states, or territories with preferential tax regimes, low or no taxation or tax havens.

2- VAT exemption on interest on financing provided by financial institutions domiciled abroad.

Article 46, letter f) of the Value Added Tax Law states that the following transactions will be exempt from the said tax, among others: deposit operations, other forms of fund-raising, and loans, regarding the payment or accrual of interests, carried out among others by financial institutions domiciled abroad that perform these activities authorized by competent authority in their countries of origin and previously qualified by the BCR, as well as corporations and foundations of Public Law or public utility, excluded from the payment of Income Tax by the General Directorate of Internal Revenue, in accordance with Article 6 of the Law that regulates said tax and that are dedicated to granting financing.

  • Which entities must request qualification from the BCR to access tax benefits?

The instruction defines its scope of application, indicating the entities domiciled abroad that wish to be qualified or are qualified by the BCR, mentioning the following:

    1. Non-profit corporations or foundations domiciled abroad. International organizations, agencies, or development institutions of foreign governments, and foreign governments do not need to be qualified by the BCR (Article 4, number 11, letter a of the Income Tax Law).
    2. Investment funds, Private Fund Administrators, public or private specialized funds domiciled abroad (Article 4, number 11, letter b of the Income Tax Law).
    3. Financial institutions domiciled abroad supervised by a financial regulation entity or authorized or registered by competent authority in their countries of origin and providing financing services (Article 158, third paragraph, letter c of the Tax Code).
    4. Financial institutions domiciled abroad, supervised by a financial regulation entity or authorized or registered by a competent authority in their countries of origin, providing financing services, constituted, domiciled, or residing in countries, states, or territories with preferential tax regimes, low or no taxation, or tax havens (Article 158, final paragraph, letter d of the Tax Code).
    5. Financial institutions domiciled abroad that carry out deposit operations, other forms of fund-raising, and lending of money, authorized by competent authority in their countries of origin, which wish to be qualified or are qualified (Article 46, letter f of the VAT Law).
    6. International organizations, agencies, or development institutions of foreign governments, and foreign governments that wish to be qualified or are qualified (Article 46, letter f of the VAT Law).
  • The instruction now allows the submission of documentation in electronic format.

The instruction we have been discussing is constantly under review by the competent authorities, with the aim of improving the qualification procedures, seeking to simplify procedures for foreign institutions and reduce risks in the evaluation process. In this case, the modifications seek to modernize the service offered to Institutions Domiciled Abroad requesting qualification according to the aforementioned tax laws. This implies allowing the electronic submission of the administrative file and documentation, eliminating the use of physical copies, and promoting the use of Electronic Signatures.

Thus, the instruction allows the electronic submission of documents through the BCR’s online system. However, it is required that these documents respect the integrity and structure of the forms established by the applicable regulations. The administrative files may be electronic and formed by the orderly grouping of documents, evidence, reports, and other elements required by law.

The Public Administration will maintain an updated electronic backup of these files, accessible for consultation as established by the Administrative Procedures Law. This backup will also serve in case of replacement due to loss or damage of the original, following the implementation plans of new technologies within the Public Administration. The submission of electronic documentation must comply with the verification, evaluation, and consultation process detailed in the instruction in section 5.10.

After reviewing the documentation, if everything is correct, the system will notify the institution which must email mailto:infocalificaciones@bcr.gov.sv to request the start of the official review of the electronic documentation.

The above has been a brief overview of the instruction to qualify institutions domiciled abroad, in the context of accessing the aforementioned tax benefits. For further information on the topic or to make any inquiries, please contact mailto:taxelsalvador@consortiumlegal.com